* Old gasoil contract attracting lion's share of liquidity
* May deliveries for new contract slump vs. April
* Timing of fund manager liquidity switch seen as key
By Claire Milhench
LONDON, May 11 The slow take up of Europe's new
cleaner ICE gasoil contract will be overcome if the exchange
follows the U.S. approach and amends its existing contract
rather than running two versions in parallel until 2015, market
Lack of liquidity in the new contract is posing a problem
for fund managers and traders looking to switch, and has led to
suggestions ICE should follow the Chicago Mercantile Exchange's
example and simply change the specification of its old contract.
Olivier Jakob, an analyst at Petromatrix, said it was hard
for people to leave the more liquid contract. "It's difficult to
run parallel contracts - the money will go where you have the
liquidity. Everyone waits for everyone else to move."
Open interest in ICE's new low sulphur gasoil contract
is still only around 1 percent of that in the old
contract, although physical traders say the new contract
is better aligned with market requirements.
The new contract needs to establish enough liquidity to
attract fund manager flows, but this poses a catch-22 as the
commodity indices and the passive money tracking them are still
in the old contract.
Jodie Gunzberg, commodities director at S&P Indices, said
there were strict eligibility criteria for including new
contracts in the S&P GSCI, a popular commodities index.
"Liquidity is a major factor in the decision," she said. "One of
the key benefits of the S&P GSCI is that it is trackable."
Traders have criticised ICE's decision to run the old
contract alongside the new until January 2015, even though this
was only implemented after extensive consultation with market
"It's very stupid to have two contracts at the same time,
it's bad management," said one senior gasoil trader. "Nobody is
going to move their flow, even though the physical players are
getting toasted by the volatility."
One of the biggest bugbears for some physical traders is a
persistent backwardation at the front end of the old ICE gasoil
curve, which does not reflect market fundamentals as demand
remains so weak.
Other traders suggested the old contract was a victim of its
own success. "It will take time because the old ICE contract is
so well established," one said.
ICE said the period of parallel trading gives market
participants adequate preparation time to migrate their
positions to the new contract. But a similar approach in the
United States has just been abandoned.
The CME completed its own switch to a low sulphur contract
by amending its existing heating oil contract. Initially it had
launched a separate diesel contract. "However, the market didn't
embrace trading in that contract," a CME spokesman said.
Gary Morsches, managing director, global energy at CME
Group, said the decision was taken to concentrate the liquidity
in one contract. "(It's) what our customers prefer. It allows
for easier rolling of positions and minimises operational and
programming challenges. The back-office workload is also lower."
Now some market participants are asking whether ICE should
do the same, rather than go through a protracted transition.
A successful first delivery in February failed to trigger a
rapid uptake. In April, some 30,000 tonnes was delivered against
the new contract and 71,800 tonnes against the old.
But in May deliveries for the new contract slumped to 8,100
tonnes, while the old contract's leapt to 403,400 tonnes.
"Everyone thought that once the whole expiry/delivery had
happened then maybe it would pick up in terms of volume but it
is still not really happening," said one trade source.
On a more positive note, some fund managers are monitoring
the new contract, looking for opportunities to enter. "We are
always trying to trade the contract that makes the most sense,"
said Philipp Polzl, co-founder of Qbasis Fund Management.
"If they are trying to make this the main contract then it
is just a question of time," he said.